Small Business

This Java Joint Needs a Bean Counter

April 25, 2001

By Karen E. Klein Q: Sales have doubled in the year since my wife and I purchased our coffee shop, but we still have not seen a profit. I have heard that it takes a restaurant two or three years to become profitable, but I don't think we can hold out that long. What can we do to become profitable now? How can I find a local restaurant consultant? How much would one charge?

---- D.C., Milwaukee

A: It sounds like you are laboring under misconceptions and operating without the benefit of good financial information about your business. First off, you've heard wrong: There's no consensus about how long it takes a restaurant to become profitable. Some eateries make money right off the bat, experts say, while plenty of others never get out of the red. In fact, figures compiled by the National Restaurant Assn. show that 80% of all new, independent restaurants fail within their first two years.

Do you have an accountant? If so, ask for monthly financial statements -- or learn to compile them yourself. The monthly profit-and-loss/income statements and cash-flow sheets will show where your establishment is running into trouble, says Ray Coen, a Los Angeles-based restaurant consultant. "If you don't know how to judge what is keeping you from being profitable," Coen notes, "then you don't know what you should do to fix the problem."

Studying your financial situation for a few months will show whether sales are too low or costs too high. If sales have doubled since your purchase and you're still not turning a profit, your problem may indeed be out-of-control expenses. If so, concentrate on bringing those costs down. "Sales will cure many evils, but eventually, you need to make sure that some of the money makes it to the bottom line," says Chuck Gohn, a Beaverton (Ore.)-based restaurant consultant.

MARKING TIME. How do your monthly expenses compare with the costs that the previous owners incurred? You should have had access to their financial statements before you bought the business. If you had to renegotiate the lease on your coffee shop, perhaps the increase in your occupancy cost -- rent and utilities -- has nullified the sales increase you've been able to achieve. Or maybe your food and labor costs are too high, making it impossible to turn a profit on increased sales unless you hike prices as well.

Arlene Spiegel, a food and beverage consultant at PricewaterhouseCoopers in New York City, suggests that you may be able to cut expenses by redesigning your coffee shop to encourage self-serve, thus lowering labor costs. Also, you might consider reducing the salaries you are paying yourself and your managers. You can further cut labor costs by graphing periods of slow and peak business to identify staffing inefficiencies, Gohn suggests. Another possibility: Renegotiate your credit-card fees and, if possible, your rent. Make sure your pricing is adequate by putting together a recipe cost sheet, which will list the exact overhead on every drink and food item you sell, and look at getting your suppliers to donate or participate in menu costs in exchange for advertising.

By tackling the problem from the revenue side, Spiegel says you may be able to increase customer spending per transaction by offering additional menu items, increasing impulse buying by retailing packaged goods, and boosting loyalty and revenues through the development of a membership club. Spiegel also says you should consider hosting special events with a food-service component, changing your hours of operation, forming strategic alliances with delivery services and related local merchants, and developing a strategic marketing plan.

CUP CALCULATIONS. Finally, you may want to look critically at the problem of internal controls in your restaurant. Employee-related theft, for example, "accounts for over 48% of restaurant failures," Gohn warns. In a coffee shop, where the person handling the cash often makes and serves the product as well, the risk of fraud is especially high. Many coffee and donut shops reduce employee temptation by posting a sign informing customers that the tab is on the house if they don't get a receipt. You may also want to consider counting paper cups before and after each shift. The number used will help to determine sales per shift, allowing you to compare actual cash-register totals with the predicted take.

As for bringing in consultants, experts don't see that as a cost-effective move until you have complete financial records at your disposal. Once you have a handle on your monthly revenues and expenses, you should be able to find a good consultant who can analyze the data. Gerald Breitbart, a Los Angeles restaurant consultant, suggests contacting the Wisconsin Restaurant Assn. "They will probably charge you somewhere between $100 to $150 per hour," he says, adding: "Look for someone who will give you a package price." You also may want to check with nearby community colleges that have restaurant-management or culinary programs: You may find some free advice from professors or students. Have a question about running your business? Ask our small-business experts. Send us an e-mail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 6th Floor, 2 Penn Plaza, New York, NY 10121. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.